The CJA 20101 transposed the EU’s Third Money Laundering Directive into Irish Law. There is a legally enforceable obligation on all Funds and Fund Service Providers to comply with the CJA 2010. The CBI2 is assigned the responsibility of monitoring the compliance of all Firms with CJA 2010.
On 18th November 2015, the CBI issued a report entitled: Report on Anti-Money Laundering/Countering the Financing of Terrorism and Financial Sanctions Compliance in the Irish Funds Sector (the “Report”). The Report sets out the expectations of the CBI in relation to AML3 /CFT4 and FS5 compliance for Funds and Fund Service Providers in Ireland (referred to collectively as “Firms” within the Report). It is based on site inspections carried out by the CBI over the course of 2014, supplemented by Risk Evaluation Questionnaires submitted by Firms to the CBI.
Commenting on the report, Head of Anti-Money Laundering at the CBI, Domhnall Cullinan said:
“Latest figures show that Irish domiciled funds have a net asset value of almost €1.8 trillion, making the Irish funds industry a significant part of the Financial Services sector. Any business with such a large variety and amount of customers, high values and volumes of transactions and a cross border nature is attractive for money laundering/terrorist financing.
The Central Bank acknowledges that many firms had responded positively to previous Central Bank communications but, as the report identifies, more work is required by firms in Ireland to effectively manage money laundering/terrorist financing risk. The Central Bank expects all Funds and Fund Service Providers to carefully consider the issues raised in the report, and to use the report to inform the development of their AML/CFT and FS frameworks.”
Key Issues Identified in the Report
Outlined below are some of the significant findings that will be of relevance to Funds and Administrators.
Risk assessment should form the basis of the Fund’s approach to managing AML risk. The Report found there was insufficient evidence that adequate risk assessments were performed in a timely manner. The CBI expects that risk assessments be conducted and reviewed at least annually, and that these assessments include all risk categories, such as geographic risk, product/service risk, investor risk and channel/distribution risk. The risk assessment should document controls in place to mitigate risks with action plans to address any gaps. Policies and procedures should be kept up to date and reflect any changes in the risk assessment.
The Report highlights that, while Funds may delegate many of their AML/CFT functions, they remain responsible for ensuring compliance with the CJA 2010 and must therefore ensure they have appropriate oversight of these outsourced activities. The CBI expects that such oversight includes a review of the Administrator’s policies and procedures along with assurance testing of AML/CFT processes, for example, through sample testing of investor files.
On-boarding of Investors
The Report identifies a number of issues in relation to investors:
- Inappropriate application of SCDD6 , and application of SCDD without supporting evidence justifying the approach;
- Deficiencies around beneficial owner information and verification;
- Failures in the management of PEPs7 , including failure of Fund Boards to retain adequate control over sign off of relationships, and failure to document source of funds and source of wealth.
Reliance on Third Parties to Conduct CDD8
Arrangements with third parties to conduct elements of CDD were found in various instances not to meet all of the required conditions. Administrators are expected to have adequate written arrangements in place with third parties covering all the necessary requirements. The Report highlights the fact that responsibility for on-going monitoring cannot be delegated to the third party.
The Report also emphasised that, where reliance is placed on third parties, regular monitoring – including sample testing – must take place.
On-going Monitoring of Customers
With reference to Section 54(3)(c) of the CJA 2010, which requires responsible entities to adopt measures to keep documents and information relating to customers up-to-date, the CBI expects Administrators to have effective policies and procedures for keeping investor records current, and emphasises that these should include consideration of trigger events.
Discontinuation of Relationships
The CBI expects that policies and procedures set out circumstances under which a Fund would cease to provide services or discontinue a relationship due to an investor’s failure to provide CDD documentation. The Report makes clear that the blocking of additional subscriptions to a Fund does not constitute the discontinuation of a business relationship.
Suspicious Transaction Reporting
The expectations of the CBI in relation to Suspicious Transaction Reporting are that:
- Meaningful and effective monitoring systems are in place to identify potentially suspicious activity;
- Policies and procedures clearly outline reporting obligations for directors and/or employees, as well as appropriate guidance on how to fulfil these obligations.
The Report notes that not all Board members engaged in on-going AML/CFT training and outlines the CBI’s expectation that all persons involved in the conduct of the business (including staff at outsourced service providers) are provided with AML training, and that adequate training records for all staff are retained.
Terrorist Financing and FS Compliance
The Report re-emphasises the importance of appropriate risk-based measures being applied to prevent terrorist financing and the key role played by effective monitoring and screening in this area. Reference is made to the “Report on AntiMoney Laundering/Countering the Financing of Terrorism and Financial Sanctions in the Irish Banking Sector”, which laid out the requirement for assurance testing to be conducted on screening systems, and for detailed procedures to be in place outlining the appropriate treatment of actual and potential FS matches.
How can KB Associates Assist?
KB Associates has operated a dedicated MLRO9 service for Investment Funds since 2008. In addition to MLRO services, KB Associates offers a range of services to UCITS10 and AIF11 structures including operational support, management company services, the provision of directors and company secretarial services.
If you would like to discuss any issues raised in this article or related to KB Associates’ services in general, please feel free to contact Mike Kirby (+353 1 667 1980), Peter Northcott (+44 203 170 8813) or Mike Parton (+1 345 946 4224).
1 The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended by the Criminal Justice Act 2013)
2 Central Bank of Ireland
3 Anti-Money Laundering
4 Countering the Financing of Terrorism
5 Financial Sanctions
6 Simplified Customer Due Diligence
7 Politically Exposed Persons
8 Customer Due Diligence
9 Money Laundering Reporting Officer
10 Undertakings for Collective Investment in Transferable Securities
11 Alternative Investment Fund